In this article, we discuss Farallon Capital: a global and diversified hedge fund and its top stock picks. If you want to skip our detailed analysis of these stocks, go directly totheTop 5 Stock Picks of Farallon Capital.
Risk arbitrage or merger arbitrage is one of the most popular strategies that hedge funds and other institutional investors leverage to try and capitalize on the outcome of a proposed merger. Founded in 1986 by Tom Steyer and Fleur Fairman, Farallon Capital is one of the most popular asset investment firms that has perfected the art of risk arbitrage.
Headquartered in San Francisco, Farallon Capital gets its name from the Farallon Island off the Coast of San Francisco. The hedge fund came into being after Steyer had launched his career in finance at Morgan Stanley, after which he earned an MBA at Stanford and ended up joining Goldman Sachs.
It is at Goldman Sachs that Steyer will get insights on the legendary merger arbitrage strategy that he would use to kick start his career at Farallon Capital and end up becoming a billionaire. Despite losing 36% at the height of the 2008 financial crisis, Farallon managed to average a 13.4% annual rate of return from its founding years.
The hedge fund tries to unlock value on the discount that emerges whenever a merger is made public. In most cases, the fund acquires the equity of the target company as its share price often explodes as the market comes to terms with the notion it is poised to be bought at a significant premium. On the other hand, the hedge fund also tends to trigger a sell short on the stock of the buying company. The risk arbitrage strategy has allowed Farallon Capital to accrue significant returns while capitalizing on the risks attached to the mergers.
Farallon shot to prominence in 1996 after British Telecommunication decided to merge with MCI Communications in a deal that was expected to take nine to 12 months. The hedge fund had taken a long position in MCI shares as part of the $25 billion acquisition. It also took a short position on BT shares.
Farallon Capital would experience a significant shock in its position after MCI announced it was facing difficulties in entering the local telephony market, which resulted in $800 million in losses. The investment represented the most significant risk arbitrage exposure that prompted the hedge fund to explore whether to stay in the position. Despite the shock, the hedge fund has invested in over 100 merger arbitrage positions.
The risk arbitrage hedge fund also placed a $300 billion bet as Microsoft Corporation (NASDAQ:MSFT) moved to acquire LinkedIn for $26.2 billion in 2016. With the investment, the hedge fund sought to collect about $6 a share on the difference between the prevailing price and the price at which the deal was to close.
Farallon Capital: A Global and Diversified Hedge Fund and its Top Stock Picks
In addition to pursuing opportunities around risk arbitrage, Farallon also seeks investment opportunities across asset classes worldwide through bottom-up fundamental research and analysis. Credit investments, long/short equity and real estate investments account for a significant share of the hedge fund portfolio, with about $36 billion in capital under management.
Regulatory filings indicate Farallon Capital remains heavily invested in the healthcare sector, with technology stocks also accounting for a significant portfolio share. The hedge fund invests in economies worldwide, including developed and emerging markets and public and private debt.
After stepping down from their lucrative career as a hedge fund manager, Steyer is channeling his efforts into saving the planet. In addition to running for president in 2020, Steyer has been interested in sustainability. Galvanize Climate Solutions is one of his new investment firms that has raised $1 billion in climate investment funds. The funds will be invested in early and growth climate startups focusing on those working on decarbonization efforts.
Farallon Capital has been aggressive, taking advantage of opportunities that have cropped up with the opening of the global economy. The hedge fund has built a massive stake in Chinese internet giant Alibaba Group Holding Limited (NYSE:BABA) as it bets on the Chinese economy, which is seeing increased inflows.
The hedge fund has also succeeded in its activist campaign at oncology-focused biotech company Exelixis, Inc. (NASDAQ:EXEL). It successfully refreshed the company's board as part of its 7.8% stake.
"They're "ready to work constructively with the rest of the board to fulfil the mandate they received from shareholders and help the company better allocate capital and focus its R&D efforts," Farallon said in a statement.
Our Methodology
After analyzing the hedge fund’s 13G fillings, we have settled on Farallon Capital's top stock picks from which it leveraged the risk arbitrage strategy to generate returns. The stocks are ranked chronologically based on the value of the stakes that the hedge fund holds. The article also gives readers unique data on how hedge funds feel about each stock. This data is based on the analysis of 910 hedge funds that Insider Monkey follows.
Farallon Capital: A Global and Diversified Hedge Fund and its Top Stock Picks
Better Therapeutics, Inc. (NASDAQ:BTTX) is a prescription digital therapeutics company that develops a form of cognitive behavioural therapy for addressing the causes of cardiometabolic diseases. BT 001 is the company’s lead product for treating type 2 diabetes. Better Therapeutics, Inc. (NASDAQ:BTTX) also develops software-based prescription digital therapeutics platforms for treating heart disease and other cardiometabolic conditions.
Farallon Capital started investing in Better Therapeutics, Inc. (NASDAQ:BTTX) in the fourth quarter of 2021. It currently owns stakes worth $357,069. A total of two hedge funds in Insider Monkey’s database had stakes in Better Therapeutics, Inc. (NASDAQ:BTTX).
Marblegate Acquisition Corp (NASDAQ:GATE) is a company that focuses on operating and acquiring businesses in the transportation and mobility sector. It is one of Farallon's top stock picks in the financial services sector focused on effecting mergers, asset acquisition, stock purchases, and reorganizations.
Marblegate Acquisition Corp (NASDAQ:GATE) is one of the smallest holdings in the Farallon Capital portfolio. The hedge fund owns stakes worth $1.56 million, having started acquiring stakes in 2021. The most significant stakeholder of Marblegate Acquisition Corp (NASDAQ:GATE) was Glenn Russell Dubin’s Highbridge Capital Management, which had a $2.33 million stake in the company.
8. ARYA Sciences Acquisition Corp IV (NASDAQ:ARYD)
Farallon Capital Equity Stake:$2.13 Million
Number of Hedge Fund Holders: N/A
ARYA Sciences Acquisition Corp IV (NASDAQ:ARYD) is a company that has no significant business activities. Its main goal is to merge with or acquire one or more other businesses through various methods. The company was founded in 2020 and has its headquarters in New York City.
Farallon Capital had a position of 200,000 shares in ARYA Sciences Acquisition Corp IV (NASDAQ:ARYD). The hedge fund's investment in ARYD was worth $2.13 million. The value of the hedge fund's stake in ARYD accounted for 0.01% of its portfolio allocation.
Swiftmerge Acquisition Corp. (NASDAQ:IVCP) operates in the financial services sector focused on effecting mergers, share exchange, asset acquisition, share purchase and reorganizations. It also serves as a particular purpose acquisition company, or SPAC, to concentrate on the consumer sector.
Farallon bought 2,000,000 shares of Swiftmerge Acquisition Corp. (NASDAQ:IVCP) at its IPO price of $10 per share, according to a Form SC 13G filed with the SEC on January 29, 2021. It currently owns 300,000 shares stakes worth $97,020 after reducing its stake by 85% from the previous quarter.
The biggest hedge fund stakeholder of Swiftmerge Acquisition Corp. (NASDAQ:IVCP) was Vikas Mittal’s Meteora Capital, which owns a $4.65 million stake in the company.
Longboard Pharmaceuticals, Inc. (NASDAQ:LBPH) is one of Farallon Capital's top stock picks in the healthcare sector that develops novel and transformative medicines for neurological diseases. The clinical biopharmaceutical company's lead product is LP352, under trial for the treatment of seizures associated with developmental and epileptic encephalopathies.
Farallon Capital bought stakes at $16 a share when Longboard Pharmaceuticals, Inc. (NASDAQ:LBPH) went public in 2021. It has been buying and selling shares, taking advantage of the swings that have come into play. The hedge fund owns stakes worth $7.3 million, accounting for 0.04% of the portfolio.
Longboard Pharmaceuticals, Inc. (NASDAQ:LBPH) had 12 hedge funds invested in it in the second quarter of 2023 out of the 910 hedge funds tracked by Insider Monkey.